December was the best month for stocks. Will the trend continue?

The S&P 500 gained an average of 1.6 percent in December, the highest average for any month and more than double the 0.7 percent gain for all months, according to data from investment research firm CFRA. Meanwhile, September is the worst average month for stocks, with an average decline of 0.7%.

The gains would be welcomed by many investors after seeing the S&P 500 fall about 16% so far this year. However, the US Federal Reserve’s aggressive interest rate tightening to fight inflation weighed on the market.

“December is usually a good time for investors, but right now they’re stuck because the focus on interest rates is what’s going to drive the market higher or lower in the short term,” said Sam Stovall, chief investment strategist at CFRA Research.

“The question this year is whether the Fed will raise rates 75 basis points or 50 basis points, and whether there will be any gloomy comments suggesting the Fed will raise rates one or two more times next year and then back off,” he said. Stovall.

December is usually a good month as fund managers buy stocks that have performed better over the year for so-called “window dressing” of their portfolios, while at the end of the year there are inflows and lower liquidity during the shortened holiday weeks, Stovall said.

At the same time, U.S. stocks rose in the last five trading days of December and the first two days of January 75% of the time since 1945, according to CFRA, in the so-called Santa Claus rally. This year, the time period begins on December 27. The average Santa rally has lifted the S&P 500 by 1.3% since 1969, according to the Stock Trader’s Almanac.

This year, however, investors’ focus has largely shifted to the Fed and the pace at which it will continue to raise interest rates as it tries to bring inflation down from near 40-year highs.

“Investors tend to be bullish on the new year, but this is still a Fed market,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “The old adage was ‘the trend is your friend, don’t fight the Fed,’ but now it’s ‘The Fed is not your friend, so don’t fight the trend.'”

Investors estimate a 75% chance the Fed will raise interest rates at its Dec. 14 meeting by 50 basis points to a target rate of 4.5%, while the probability of another move of 75 basis points is 24%, according to CME instrument FedWatch.

Minutes released Wednesday from the Fed’s Nov. 2 meeting showed that a “substantial majority” of policymakers agreed that it would “probably be appropriate soon” to slow the pace of rate hikes, even though Fed members believed , that there is “significant uncertainty about the final level” of how rates should rise.

Another excessive rate hike could derail the S&P 500’s more than 10% gain since early October, which has been fueled largely by hopes that inflation has crested from 40-year highs, allowing the Fed to slow and eventually halting its most aggressive rate hike cycle since the 1970s.

Fed Chairman Jerome Powell, who will speak on Nov. 30, signaled that the central bank may move to smaller rate hikes next month, but also said that rates may eventually have to become more up from the 4.6% policymakers thought would be needed in September by next year.

“The sharply reduced valuation of public and private companies is one painful consequence” of higher interest rates and will likely mean the S&P 500 will fall 9% to 3,600 over the next 3 months, Goldman Sachs strategists wrote in a note on Monday.

Still, there may be other reasons to hope for another seasonal rally this year.

Short sellers have covered nearly $30 billion in short positions since the start of the month, with the largest covering upcoming consumer discretionary, healthcare and financial stocks, according to S3 Partners.

“Short sellers are reducing their positions as the market rises and taking losses relative to the market – and possibly reducing their positions in anticipation of a rally at the end of the year,” said Igor Dushanovsky, managing director of S3 Partners.

Painful double-digit declines in both U.S. stocks and bonds, meanwhile, have made both asset classes more attractive to long-term investors, said Liz Ann Saunders, chief investment strategist at Charles Schwab.

“Things look pretty decent if you have a one-year time horizon, but not without potentially significant volatility over the next quarter or two,” she said.

This story was published by a wire agency feed with no text changes. Only the title has been changed.

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